CONSUMER PERCEPTION TOWARD BUYING INSURANCE

JULI'LA 13INTI JAAFAIt

This project is submitted in partial fulfillment of the requirements for the degree of Bachelor of Business Administration with honours

(Marketing)

Faculty of Economics and Business UNIVERSITI MALAYSIA SARAWAK

2010

ABSTRACT

CONSUMER PERCEPTION TOWARD BUYING INSURANCE

By

Juliaa Binti Jaafar

Insurance is one of the important needs for every people during their lice. Majority of

people do not care about the importance of having insurance. Insurance is the transfer

of risk by an individual, organization, business, to the insurance company. The issues

surrounding the measurement and provisions of service quality in the insurance sector

are becoming increasingly important and influence toward consumer purchasing

insurance. The purpose of the current study is to identity the läctors (service quality)

at'tecting customer satisfaction toward insurance. The study is based on responses of

258 respondents from consumer in Temerloh, Pahang that were collected through a

questionnaire. Various statistical tests such as reliability analysis, factor analysis and

correlation have been carried out to analyze the result. The most important service

quality factor is reliahility and responsiveness. In addition, the result also shows that

service quality satistaction will influence the consumer to maintain to use insurance

service at the same company.

ABSTRAK

TANGGAPAN PENGGUNA TERHADAP PEMBELIAN INSURANS

Oleh

Juliza Binti Jaafar

/n. cttrans adalah kr! )c'rluun hag'i sc'tiu! ) orang c/a/an nrc'njalani kc'hiclu! )an harian.

Kc'hant'akun urarrg tidak nu'ng'umhil 1)c'rhatiun trntang kepentingan unttlk mc'nti/iki

in. ti'tn"an. c. ln. curart. c adalah nu'ntincluhkan tar>gg'tu><s, 'an utau risiko c/ari! )ac/a inc/it'iclu,

urgunisasi, 1)c'rniag'acm kr! )ac/u st'arikat insurans. Faktur sc'kc'li/iºg clan kualiti

1)c'rkhi[hncltan ntc'rrjacli ukurun c/a/um sektor insurans aclalah scutg'at 1)c'nting sc'ria

nt('n/1)('r1S, '[! rt! /ti /)('rig'g'1lrta tlritllk lnrmhr/i inst! /Yts. TtljucJ/1 k[Ijiait ini [lijulunkun

adalah untuk ntc'ng'ruul/)a. cti /aktur kualiti /)rrkhicMlatan t'ang nlc'nthrri k('sarl kr! )a[la

taha! ) kr! )ua. can 1)rrtgg'rnta trrltacla! ) insurans. Kujicm ini [lilakukan hrrcla. varkan

timlak hclla. c 25, S' urang n'. c/)un[k'n clcu"i! )ucla /)c'ng'g't! na instn"cts di 7i'mc'rlnh, 1'ah[ntg'

nl('/altci hurang sua/ . crlic/ik. 1'rlhag'ai lijian statistik h'lah [lig'unukun, irti tc'rntasuk/c!! t

artl! /isis krhu/rllprr('al'(lan, anallsls /aktur llan /(ur('la. ci t'cn{g cliana/isa hag'i mrncla! )at

krynuusan kajian. Faktur kualiti 1)('rk/tichnatan . t'ang sang'at /)rating adalah

krhulc'h/)('rc'a. t'aan clan tirtclakan. l amhahan 1)ula, hasil k('/! nlsarl nlrnunjukkan

krlualsan kua/iti 1)c'r0iic/nlatau akan mrntln'ng'arulti 1)rng'g'una untuk trta! )

nt('ug'g'tmakan /)c'r'khic/ntcltan instu"lms di da/ant . et'ur ikctt t'ung' . cantu.

ACKNOWLEDGEMENT

ýss )J 1 ýyoý,

J 1 AU)

äS,,, y AU

I would like to thanks God with the pennission to me finish this final year

project.

Firstly, thanks to my parents Mr. Jaafär Bin Ibrahim and Madam Iiasnah

Binti Ismail and also my Calmly because their supportive to finish this final year

project. The good deeds be appreciated.

Also thanks to my supervisor Mr. Bakri Bin Abdul Karim on the

cooperation, interest. support and encouragement to finish this project and to all

staff at Faculty Economics and Business (FEB), third year marketing students

program, thanks you with your cooperation to finish the final project.

Lastly. thanks to everybody that involve directly and indirectly to finish this

final year pr(,. J'Cct.

Thanks. Wassalam.

TABLE OF CONTENTS

LIST OF TABLE .................................................................................................... x

LIST 0 FIGURE ..................................................................................................... x

CHAPTER 1: INTRODUCTION

1.1 Introduction ............................................................................ 1

1.2 Problem Statement ..................................................................... 6

1.3 Research Objective ...................................................................... 6

1.3.1 General Objective .............................................................

6

1.3.2 Specific Objective ..............................................................

7

1.4 Research Question ......................................................................... 7

1.5 Rational Research .....................................................................

K

1.6 Framework Concept .................................................................. 9

1.7 Research Scope .............................................................................

II

CIIAPTF; R 2: LITERATURE REVIEW

2. I Introduction ........................................................................... 12

2.2 History cºf Insurancc .................................................................... 12

2.3 Type of insurancc Industry .......... ............... ...............................

I3

2.4 Long Term ('arc Insurancc ........................................................

17

2.5 Reason tör Purchasing and Not Purchasing Insurance ................................ 20

2.6 Perception .............................................................................................. 2t)

vii

2.7 Satisfaction and Service Quality ......................................................... 21

2.7.1 Quantity Dimension of Service Quality .................................... 26

2.7.2 Quality Dimension of Service Quality .......................................

26

2.8 Consumer Behavior ................................................................. 27

2.9 Factor Affective Insurance Purchase Decision .....................................

28

2.10 Expectation ........................................................................... 29

CHAPTER 3: RESEARCH METHODOLOGY

3.1 Introduction ........................................................................... 30

3.2 Research Design ...................................................................... 30

3.2.1 Survey Method ..................................................................

30

3.2.1 Pre-test(Pilot Test) ............................................................... 1

3.3 Population and Sampling ...........................................................

32

3.3.1 Population ....................................................................... 32

3.3.2 Sampling ................................................................................

32

3.4 Research Instrument ............................................................................ 34

3.5 Data Analysis .......................................................................

35

3.6 Research Hypothesis ..................................................................

37

CHAPTER 4: FINDINGS

4.1 Introduction .......................................................................... 41

4.2 Frequency Distribution ...............................................................

41

4.3 An Analysis on Respondents' Demographic Protile and

Perception ot'Consumcr ............................................................ 42

viii

4.4 Reliability Evaluation ............................................................... 46

4.5 Factor Analysis ...................................................................... 46

4.6 Correlation ............................................................................................ 49

4.6 Mean ...................................................................................... 50

CHAPTER 5: DISCUSSION OF FINDINGS

5.1 Introduction ................................................................................... 52

5.2 Discussion of Findings ........................................................... 52

5.2.1 Frequency of Respondent Demographic Profile ......................

52

5.2.2 Factor Analysis .............................................................. 53

5.2.3 Correlation ...................................................................... 56

CHAPTER 6: CONCLUSION AND RECOMMENDATION

6. I Introduction .............................................................................

K

6.2 Conclusion ...........................................................................

58

6.3 Recommendation ...................................................................... 60

6.3.1 Recommendation for Insurance Service ..................................

60

6.3 .2 Recommendation for Insurance Company

.............................. 61

6.4 I. im itation ..............................................................................

6.

6.5 Future Research ......................................................................

64

ix

APPENDIX

Appendix A: Questionnaire

LIST OF TABLE

Table 1.1: Insurance Key Indicators' 19902,2005 until 2008 .......................... 5

Table 4.1: Frequency distribution of questionnaire ............................................ 41

Table 4.2: Frequency of Respondents Demographic Profile .............................. 43

Table 4.3: Frequency for Perception of Consumer toward Service Quality....... 45

Table 4.4: Reliability Test ...................................................................

46

Table 4.5: Kaiser-Meyer-Olkin and Bartlett's Test ............................................. 47

Table 4.6: Rotated Component Matrix for Perception toward Buying Insurance

............................................................................................ 48

Table 4.7: Correlation and Mean for Overall Service Quality, Overall Satisfaction and Overall Expectation toward Insurance ....................

50

Table 4.8: Mean for Majority of Mean from Five Perception toward Dimension of Service Quality 51

Table 4.9: Mean for Service Quality .................................................................. 51

LIST OF FIGURE

Figure 1. I: Framework ..................................................................

10

Figure 2. I: Framework ..................................................................

25

REFERENCE

Reference: .................................................................................

hh

x

CHAPTER 1:

INTRODUCTION

1.1 Introduction

In Malaysia there are have five statutory insurance association, I`ersatuan

Insurans Am Malaysia (PIAM) of general (non-life) insurers, Life Insurance

Association of Malaysia (LIAM), an association of life insurers, /'ersaluan Insuran

Kehangsaan Malaysia (NIAM), which represents locally incorporated insurer with

more than 52% Malaysian equity, insurance Broker Malaysian Loss Adjuster

(AMLA) and an association of insurance adjusters. The Services sector in Quarterly

Balance of Payments Performance April - June 2009 recorded a better pertbrmance

in this quarter with a turnaround from a negative 0.2 percent to an increase of' 1.6

percent. The sub-sectors of Finance and Insurance recorded increase 3.3 percent.

Statistic show arithmetic 35 percent only people in country have insurance covered

and 65 percent people barer to risk.

In current life, people are always exposed to risks at anywhere and anytime.

Insurance is a one way to reduce personal exposure to loss by guaranteeing a

specified sum of' money when particular event occurs. Insurance is based on two

viewpoints, individual's viewpoint and society's viewpoint (Chun and Lim, 2000).

Insurance is viewed as an economic device whereby an individual pay a premium to

protect him against large financial loss from an individual's viewpoint. The primary

I

function of insurance is to provide a sense security and the counterpart of risk. The

society viewpoint, insurance is an economic device to eliminate or reduce risks by

transferring the risks from individual level to the society.

Beside that, insurance means equitable transfer of the risk of the potential

loss, from one entity to another, in exchange for a premium and duty of care

(Tsoukatos and Rand, 2006). Insurance a way of protecting the policyholders from

any costs that may arise from damage to their property or their health. Insurance

means of guaranteeing financial protection against various risks.

Insurance is important to protect the family's income, protection of the tiºmily

business, financial protection during disability, plan of medical or health, plan tbr tile

education of children, retirement fund, and measure of the value of self, as a gift fbr

loved ones, part of a comprehensive financial plan and as a support to a friend.

Insurance of all kinds and is used to help protect consumers when certain things

happen. Insurance have the most part, this protection comes in the form of money,

damages, financial loss and provide protection from liability but in the end, it usually

conics down to money.

Basal on case of automobile insurance, the reason insurance is important is

that it protects consumers' from having to pay damages in the event that consumers'

are Found at fault for the accident. Furthermore, any medical costs that might be

associated with an accident wherein consumers' are ti)und at fault. Home owner's

I

insurance provides minimum coverage level is often determined by the lender.

Furthermore, many home owners insurance will add to this level of coverage in order

to protecting, such as furniture and other personal items against loss. Besides,

coverage usually extends to consumer who may be on the property they encounter an

accident and sustain injuries. The other importance of insurance is to protect the

owner from legal actions. This is may arise from outside parties as well as to protect

the owner from real property damage such as tire. With home owner's insurance,

there is often controversy over and also known as flood insurance. The only way to

know if consumers' are covered for flooding is to ask the direct question to

consumers' insurance company and to read what is in the insurance contract.

In Malaysia, there are many types of insurance. 'These include life insurance

and general insurance, two difTerent policies and covers different aspects in

consumers' life. Life insurance to cover that pays out certain amount of money to the

insured or their specified beneficiaries upon a certain event such as death of' the

individual who is insured. Insurance also oflcred in a Family Takaful plan, this plan

a Shariah-based approach to protecting all consumers.

General insurance is basically an insurance policy, which protects consumer

against losses and damages other than those covered by lite insurance. For more

comprehensive coverage, to know about the risks covered to ensure that consumers'

are protected from unt6rescen losses. Insurance is very important to all people in

3

country. However, many people do not know about this, because of less confident,

disbelieved and disagree about service of insurance.

The one insurer is in the process of providing Bank Negara Malaysia (BNM)

is proposed business plan to restore its margin of solvency (Central Bank of

Malaysia, n. d). The considerable consumers' satisfaction with local insurance

industry and the number of complaint against insurance companies received by

BNM merely confirmed this state of affairs (Central Bank of Malaysia, n. d). In this

regard, it is interesting to note that 1325 written complaints received by BNM in

1999,82.9% were related to general insurance business and 17.1 % were related to

life insurance business. In 1997, the total number of written complaints totaled 1259

the lowest received by the authority since BNM assumed supervision of the

insurance industry in 1998 (Central Bank of Malaysia, n. d).

4

Table 1.1: Insurance Key Indicators' 19902,2005 until 2008

Market Structure 1990, 2005 2006 2007 2008

No. of Licensees 147 119 121 126 128

Direct Insurers 57 42 42 41 42

Life 3 7 8 8 9 General 39 26 26 25 26 Life and General 15 9 8 8 7

Professional reinsurers 1 7 6 7 7

Life - I I I I General 1 5 4 5 5 Life and General - I I I 1

Insurance brokers 46 34 35 34 34 Adjusters 43 39 38 37 37 Financial Advisers n. a. n. a. 2 7 8

No. of registered agents

Life 37,373 78,810 75,340 75,587 74,887 General 14,456 48,088 40,869 39,165 38,776

No. of Offices

Insurers 448 720 709 705 729 Insurance brokers n. a. 27 27 25 26 Adjusters n. a. 144 157 172 174 Financial Advisers n. a. n. a. 2 2 2

No. of resources employed

Insurers 10,173 19,453 19,740 20,600 20,825

Insurance brokers 787 1,253 1,289 1,250 1,294 Adjusters 694 1,779 1,954 1,955 1,924 Financial Advisers n. a. n. a. 6 43 47

No. of qualifications held 2,091 11,733 12,195 12,816 12,896 by insurance personnel`

Source: Gavcrnor Messenger, Central Bank cif Malaysia, 200K.

5

1.2 Problem Statements

Although insurance is important to protect the family's income, financial

protection during disability, liability, damages and planning of medical or health,

there have been only small numbers of people purchase insurance and satisfied with

insurance service. Thus, in this study we attempt to identify the factors that influence

consumers towards purchasing insurance.

To the best of our knowledge, there is no such studies has been conducted on

the issue particularly in the case of Temerloh, Pahang and Malaysia. Thus, we hope

to partially till the gap in the literature and to provide recent evidence on consumer

perception towards purchasing insurance.

1.3 Research Objective

1.3.1 General Objective

The main objective of. this research is to identify or evaluate

the factors underlying that influence consumer perception toward

buying insurance in lemerloh. Pahang.

6

1.3.2 Specific Objective

Perception

To identify the perception of consumer include satisfaction in

service quality insurance in Malaysia. Dimension of service quality

including reliability, responsiveness, assurance, empathy and tangible.

Expectation

To identify the customer expectation toward insurance, these

include perceived of service quality such as quality surprise,

satisfaction quality and unacceptable quality.

1.4 Research Question

Does the level of tangible influence consumer perception toward buying

insurance''

Does the level of reliability influence consumer perception toward buying

insurance''

Does the level of responsiveness influence consumer perception toward

buying insurancc?

Does the level of assurance influence consumer perception toward buying

insurance?

7

Does the level of empathy influence consumer perception toward buying

insurance''

1.5 Rationale Research

The importance of this research is to recognize the perception of insurance

consumer in Temerloh, Pahang. Service quality is very important to consumer

whereas the problem is service quality is less of satisfaction and influence consumer

perception toward insurance service. This research can help the insurance companies

to improve the quality of services and change the perception of consumer toward

insurance service. For example, to improve and provide the policy insurance with

good and to do more promotion about insurance which bring advantage and attract

consumer to purchase insurance.

In this research, it can help insurance industry to identity factors that

influence consumer in purchasing and planning their business strategy. This research

also to get knowledge about how etlcctiveness the service quality influence the

consumer purchasing. Therefore, company insurance can use this research to

improve their service quality. The other important of this research can give

information about service quality and consumer expectation or have a relationship

with other.

8

Besides that, this research aims to establish insurance industry with motive to

show that the insurance is important to all consumers. With this, insurance industry

at Temerloh, Pahang can fast develop and increase country economy. This research

can make for reference resources to researcher in the future to continue build the

insurance industry without consider society and background.

1.6 Framework Concept

The major factors that play the role in developing consumer's perception

towards buying insurance are consumer loyalty, service quality, ease of procedures,

satisfaction level, company image and company-client relationship. Based on this

research, researcher will he focusing to service quality factor only. The best

importance performance to assessing service quality in this study are evaluating the

quality of their insurance provider are more likely to place more emphasis and

importance some criteria than others. An alternative method for assessing service

quality based on the importance or pertornmance paradigm has been adapted for this

study, because it is believed that individuals evaluating the quality oFtheir insurance

provider are more importance on some criteria than others. This study uses the

'SFRVQUAl. MODEL' that can measure the perception and expectation of'

consumer about the buying insurance service in "l'cmcrloh, Pahang.

9

Figure 1: The Conceptual Framework: SERVQUAL. MODEL.

Word of mouth

DIMENSION OF SERVICE QUALITY

" Reliability

" Responsiveness

" Assurance " Empathy " Tangibles

Personal need

i

Expected service

Perceived service

I---ºI

Past experience

PERCEIVED SERVICE QUALITY 1. Expectation exceeded ES<PS (Quality surprise) 2. Expectation met ES=PS (Satisfactory Quality) 3. Expectation not met ES>PS (Unacceptable Quality)

Source: Parasurarnan, A., Zeithaml, V. A., & Berry, L. L. (Fall, 1985). A Conceptual Model of Service Quality and its Implications for Future Research. In Fitzsimmons, J. A., & Fitzsimmons, M. J. (Ed. ), (2001). Service Management. - (Inc erstanding Service and Service Quality (pp. 44). Boston: Irwin/McGraw-Hill.

I0

1.7 Research Scope

This study focuses on the population of the local consumers to identify their

perception of buying insurance. The purpose of this study is to identify the factors

that influence consumer perception and expectation toward purchasing insurance.

The sample of the research is collected from the local state in Temerloh, that they

have an experience or use the insurance service. 258 respondents at Ternerloh,

Pahang are chosen randomly to get the probability sample. All the respondents are

chosen from variety of gender, age, race, status, occupation, income and education.

Il

CHAPTER 2:

LITERATURE REVIEW

2.1 Introduction

This chapter reviews some concepts relating to the topic of this research

based on previous research and studies. It includes history of insurance, type of

insurance industry in Malaysia, long term care insurance, reason for purchasing and

not purchasing insurance, perception, satisfaction and service quality, consumer

behavior, factor affective insurance purchase decision and expectation.

2.2 History of Insurance

Insurance is a concept that dates back to classical times and was already quite

a develop industry in the seventeenth century (Chua and Lim, 2000). By the middle

of the 14`f' century, as evidenced by the earliest known insurance contract, marine

insurance was practically universal among the maritime nations of Europe. Insurance

developed rapidly with the growth of British commerce in the 17'x' and 18'x' century.

According to Chua and Lim (2000), the first local life insurance company was

started in 1908 by a Canadian, called the Great Eastern Lite Assurance Company

Limited.

12

The insurance industry has gradually emerged to become an important

component of the financial services sector in Malaysia in the past decade (Central

Bank of Malaysia, 1994-2005). The insurance industry as an agent of social

inclusion continued to increase in importance within the economy (Central Bank of

Malaysia, 2004). The positive growth of the insurance industry in year 2004 due to

the growing level of risk awareness among Malaysian and rising income levels,

demand for medical and health insurance as well as life insurance plans remained

strong (Central Bank of Malaysia, 2004). The insurance industry of Malaysia

maintained growth in 2005.

2.3 Type of insurance industry in Malaysia

Insurance service is defined as service by conveyance that provides service to

the public. Public insurance includes life insurance and general insurance. Lite

insurance main products are whole life, endowment, term, investment-linked, life

annuity plan and medical and health. For the main products of general insurance

includes motor insurance, tire insurance, house owners insurance, householders

insurance, personal accident insurance, medical and health insurance and travel

insurance.

Specifically. the lite insurance industry hopes to allow its sales personnel

access and connection to the corporate databases in order to reduce the time and

costs associated with employees travelling to and from the company and the process

13

of issuing and transcribing documents (Luarn, et a!., 2003). Consumer must buy life

insurance because to ensure that consumer immediate family has some financial

support after consumer demise, to finance children education, to have a savings plan

for the future so that consumer have a constant source of income after retirement and

to ensure that consumer have extra income when earnings are reduced due to serious

illness or accident.

In general, benchmarking can be viewed as an external focus on internal

activities, functions or operations in order to achieve continuous improvement

(McNair and Leibfried, 1992). An agency relationship is defined as a contract under

which one or more persons (the principals) engage another person (the agent) to

perform some service on their behalf which involves delegating some decision-

making authority to the agent (Jensen and Meckling, 1976).

When in case of theft or accident, motor insurance is covers consumer

vehicle, motorcycle, car or lorry. Three types of motor insurance available is include

third party, tire and theft and comprehensive cover. Coverage dictates are level for

the claim if consumers' vehicle sustains loss or damages. More people in Malaysia

are using the internet to search for car insurance products. Two-thirds of individuals

in the UK searching tier insurance online are interested in motor insurance cover

(Uatamonitor 2001,2002). One of the most important insurance policies that

consumer can buy is home insurance, or houseowner/householder insurance.

14

Furthermore, home is one of the largest financial investment and very

important to protect it. Three main types of policies which consumer can buy to

protect their home, this includes basic fire policy, houseowncr policy and

householder policy. Besides, the basic fire policy provides consumer with coverage

for the building only and covers loss or damage by fire, lightning or explosion.

The house owner policy provides additional coverage compared to the basic

fire policy. This is includes loss or damage due to flood, burst pipes and others. Over

the years the "insurance market" including the FOC (Fire Offices Committee), Fire

Prevention Association, Loss Prevention Council and enlightened brokers, has made

a major contribution to the tire protection of property (Bill Hirst, 1994). July 1985

saw the demise of the Fire Insurance Tariff's and the partial withdrawal of the

"general rules" for conducting tire insurance business.

Besides, householder policy can cover consumer household contents and

includes coverage for causing death injury to consumer as the insured. This policy

does not cover damage to the house itself. The householders' insurance covers almost

identical to houscowners' insurance, but the protection is meant for the contents and

not for the building. Furthermore, this policy would also be appropriate to renters as

the landlord's policy only covers the building and not the possessions of the renters.

The other type of general insurance is personal accident insurance. Personal

accident insurance or known as (PA) insurance is an annual policy which provides

compensation in the event of injuries, disability or death caused solely by violent,

15

accidental, external and visible events. This is different from life insurance and

medical and health insurance. The type of coverage normally provided under

accident insurance policy include accidental death, permanent disablement,

temporary total or partial disablement, medical expenses, corrective surgery,

hospitalization benefits and funeral expenses.

For the medical and health insurance (MHI), this insurance policy which is

designed to cover the cost of private medical treatment is very expensive, especially

with hospitalization and surgery. When emergencies, consumer won't have to worry

about the cost of seeking treatment because MHI can ensures. MHI also provides

consumer with an income stream while to do treatment. Three main types of policy

is hospitalization and surgical insurance, dread disease or critical illness insurance,

disability income insurance and hospital income insurance. The World Health

Organization (WHO) defines health as complete physical, mental and social well

being, not merely the absence of disease and injury (Parekh, 2003). Accordingly, a

country's health system comprises all the organizations, institutions and resources

devoted to produce health services (Gupta, 2006).

The travel insurance coverage is usually limited to the period of' consumer

travel. Insurance companies may ofkr various combinations of'protection to cater to

the specific needs of customers, this is including long term annual policies tier a

frequent traveler. The travel insurance can be purchased for consumer to insure

against travel related accidents, losses or interruptions include personal accident,

medical-related expenses, loss of travel or accommodation expenses due to

16